The birth of a new baby is a major milestone in anyone’s life. But ask any parent, and they will tell you raising a kid doesn’t come cheap.
“New families aren’t prepared financially,” says Will Smayda, Southern California regional sales manager for Merrill Edge. “For starters, they don’t know how much it’ll cost both immediate [term], as well as over the next 18 years.”
A new baby can cost almost $10,000 during the first year, according to BabyCenter. “You don’t finance this, it’s out of pocket or on a credit card,” says Smayda.
Since parents’ lives change after babies are born, experts suggest discussing budgets and finances before diapers and midnight feedings become priority.
Create a Baby-Proof Budget
“Every family should have a budget,” says Jordan Amin, chair of the National CPA Financial Literacy Commission at the American Institute of CPAs. Expectant parents should carefully evaluate any non-essential spending to shore up extra money for the baby, and create a budget.
“Be honest with yourself about what you’re spending,” says Amin.
Soon-to-be parents should strive to create cushion for expenses like diapers that cost from $30 to $85 per month or formula that rings in around $60 to $100 per month, according to BabyCenter.
“If you’re going to put a line item for child expenses, double your anticipated expenses,” says Smayda. “Then you have to go find that money.” Any surplus can go into savings.
What to Buy
There’s a never-ending supply of things to buy for a baby. “You really have to get grounded in the fact that your love for your child is not measured by how much you spend on them, period,” says Scott Halliwell, certified financial planner at USAA. “There’s all this enthusiasm and the immediate response is to go buy a bunch of stuff.”
Shopping for a new baby is exciting, but it should not break the bank. “Once the baby is born, you’re going to get every offer under the sun and magazines telling you everything that’s fashionable,” says Walter Primoff, director at Altfest Personal Wealth Management. “If you do this with over exuberance, you could come out with a lot of debt.”
Experts recommend waiting until after birth to make most purchases. Emotions will be calmer, and people tend to make better financial decisions if they’re not emotionally charged up.
“There are very few things you have to have when you bring a baby home, [like] a car seat, a place for the baby to sleep, and diapers,” says Amin. “They don’t use a high chair in the beginning, or a swing or stroller the first day they’re born. Give yourself a moment to catch your breath and to think a little more clearly and rationally.”
Amin suggests talking to other parents to learn what products are worth the cost and to be sure to check the safety standards on purchases.
Know What Your Health Insurance Covers
“Know what the birth will cost,” advises Primoff. Health insurance plans have different co-payments and deductibles and may not cover the entire cost of C-sections, doctor visits, and hospital stays.
“It’s very important not to wait to understand your insurance coverage,” says Suzanna de Baca, vice president of wealth strategies at Ameriprise Financial. Once your baby is born, they need to be added to your policy. “With everything on your mind, you can forget to sign your child up for coverage.”
De Baca also suggests reviewing life insurance and disability coverage. “These are important to add when you have a child and to add to your budget.” Your policies through an employer may be sufficient but decide if this is enough coverage if something happens.
Update Your Estate Planning
Experts agree that every parent should have a will, power of attorney and guardianship plan. Even though the probability of both parents passing is small, parents need to name a guardian for their child, says Halliwell. “It doesn’t have to be perfect, it just has to be done otherwise the court will decide the child’s guardian.”
While preparing a will, Amin recommends having a medical directive in place in the event something happens to the mother while giving birth.
Plan for Child Care
Parents should decide whether a parent will stay home to care for the child or find child care before the baby’s born.
“If the parents both plan on working, the sooner you start on that one, the better,” says Halliwell. “If you wait, it might be more expensive than if you planned and you may have fewer choices that might drive up your cost.”
Depending on where you live, childcare in a family home can cost between $3,850 and $12,100 per year and childcare in a center can cost between $4,650 and $18,200, according to the National Association of Child Care Resource & Referral Agencies.
“Decisions about childcare and babysitting should be very carefully calculated,” says de Baca. “Look at your own situation.” If one person isn’t going to stay home, she suggests calculating the cost of childcare and weighing that against your income. “The decision about a parent leaving the workforce isn’t just about the loss of income but also loss of access to a retirement plan.”
Start Saving for College
Experts recommend factoring education costs into your financial plan from the start.
“The longer you have to save, the better,” says Halliwell. He recommends putting aside $25 to $50 per month in a 529 plan. “It’s easier to adjust what you’re doing than to start from square one in most cases,” says Halliwell.
Since opening accounts may not be a priority after the baby comes, Amin suggests opening a tax-deferred 529 account in a parent’s name. “You can make yourself the beneficiary, [and], as soon as the child’s born, you can transfer the account [to your child].”
A new baby is special experience for a family. “Having a child changes many things in your life, but now’s the time to take stock of where you are financially, where you’d like to get financially, and begin making the changes to get from point A to point B,” says Amin. “Once the baby’s born, you’re going to have your hands full.”